Question

Kiran needs additional short-term financing for his robotics company, so he asks his suppliers if they could issue a discount if he pays his bills early.

What type of financing resource is Kiran using?

• a) Factoring
• b) Trade credit
• c) Peer-to-peer lending
• d) Barter

What does the residual dividend model mean for investors?

• a) They should expect dividend distributions that are equal to net income.
• b) They should expect to consistently receive the same dividend.
• c) They should expect a level of uncertainty regarding their dividends.
• d) They should expect to always receive very small dividends.

Which of the following is a goal of working capital management?

• a) To minimize free working capital and maximize opportunity costs
• b) To ensure liquidity and increase cash holding costs
• c) To lengthen the span of time between payment of accounts payable and collection of accounts receivable
• d) To balance adequate cash flow against maximal returns

Which of the following investors would likely prefer a cash dividend over a stock dividend?

• a) Kylie is a high-income earner and prefers to avoid additional taxes this year.
• b) Enrique subscribes to the "bird in the hand" theory when it comes to dividends.
• c) Layton prefers when companies let him decide how to benefit from his dividends.
• d) Harriett is more focused on long-term outcomes than short-term ones when it comes to investing.

What is one advantage of NPV as a capital budget method?

• a) It is flexible, in the sense that the discount rate can be adjusted to account for factors like risk.
• b) Cash flows and the discount rate are easy to accurately determine.
• c) It is equally accurate whether cash flows are known or estimated.
• d) It accounts fully for opportunity costs.

Which of the following types of financing is typical for a business in its mature stage?

• a) Start-up venture capital
• b) Second-round venture capital
• c) Bank loans
• d) Equity

Answer 1

1]

(b) - Trade credit.

Trade credit is when supplier financing is used as a source of short-term financing of working capital

2]

(c) - They should expect a level of uncertainty.

In the residual dividend model, earnings are first used to finance capital expenditures, and any leftover earnings are distributed to shareholders. Thus, there is always some uncertainty because earnings and capital expenditures keep fluctuating, and cannot be known beforehand.

3]

(c) is the correct option. Delaying the time of payment of payables, and speeding up the collection of receivables improves the float, and decreases the investment in working capital.

(a) is incorrect - Opportunity costs should be minimized

(b) is incorrect - Cash holding costs should be decreased

(d) is incorrect - Cash flow is determined by various factors, not just by working capital

4]

(b) - Enrique would prefer a cash dividend because for them, cash in hand is worth more than additional stock (which may pay higher dividends later).

(a) is incorrect. Cash dividend is taxed, but stock dividend is not

(c) is incorrect. Layton may prefer either.

(d) is incorrect. They would prefer stock dividends

5]

(a) is the correct option.

(b) is incorrect - They are not easy

(c) is incorrect - It varies with the changes in cash flows

(d)

is incorrect - It does not account fully

6]

c) Bank loans. A bank loan is relatively easy for a mature company to obtain, as compared to early stage ventures.